Cross Subsidy

The Electricity Act, 2003 (“the Electricity Act”) aims to put in place a regime where electricity generators and consumers could choose the entity to or from whom they want to sell or purchase power. To achieve this, the Electricity Act provides for non-discriminatory open access, which means that a generator or a consumer can require transmission or distribution licensees, that is, entities which own and operate the transmission and distribution systems, to allow them to transfer power through these systems to the intended recipient. The distribution licensee cannot deny such access except for technical reasons. Section 42(2) of the Electricity Act provides that the state regulatory commissions should allow open access subject to the payment of CS Surcharge. The section also states that CS Surcharge shall be progressively reduced and eliminated.

What is Cross Subsidy Surcharge?

Historically, Indian industrial and commercial consumers have been paying a higher tariff for the electricity they consume. This is in order to ensure that domestic and agricultural consumers receive power at a more affordable rate. This additional amount, known as cross-subsidy has continued under the Electricity Act, since regulators are allowed to set differential tariff based on the consumer category.

When an industrial or commercial consumer decides to purchase power from an independent generator and not from the distribution licensee in that area, that distribution licensee loses the cross subsidy amount. The CS Surcharge is imposed on the consumer to ensure that the distribution licensee does not pass on this additional amount to the domestic and agricultural consumers, which can result in a steep rise in the cost of power. The Electricity Act, however, recognizes that the ultimate goal is to eliminate cross-subsidy as concept, so that all consumers pay the same amount for electricity.

CS Surcharge has been, for the last several years, the single biggest roadblock to an open access regime, and the development of a market where a consumer can choose to purchase power from a generator of its choice. Most states have been charging a high level of cross subsidy (often in excess of Rs 1 per unit) which means that it does not make financial sense for a private operator to try and purchase power from a generator other than the distribution licensee, because after adding the cross-subsidy surcharge and other charges, he ends up paying a higher amount. Prohibitive cross subsidy surcharges in most states have meant that the option to purchase power from others has remained only on paper.

Measures to curb Cross Subsidy Surcharge

The Ministry of Power, Government of India (“the MoP”) has also been worried about the effect that the CS Surcharge has been having on the growth of the electricity market. The National Electricity Policy states that the imposition of CS Surcharge should not be onerous.

The National Tariff Policy, 2005 also states that the computation of CS Surcharge should be done in a manner that while compensating the distribution licensee, it does not constrain the introduction of competition through open access. The policy recognizes that “a consumer would obtain open access only if the payment of all the charges leads to a benefit for them”.

In case a consumer moves into open access, the CS Surcharge shall be calculated as the difference between (i) the tariff applicable to the relevant category of consumers; and (ii) the cost borne by the distribution licensee to supply electricity to consumers of the applicable class. The cost of supply is by the avoided cost method. This means that since the distribution licensee can be in a position to discontinue purchase of power at the higher margin or the merit order (a list of different prices at which the distribution licensee purchases power from various generators), the cost of supply will be computed as the aggregate of (a) the weighted average of the power purchase costs of the top five per cent of the merit order and (b) the distribution charges determined by the regulatory commission.

Open Access and its denial

Even though open access has been allowed in principle, the implementation has been dismal, since the generator requires a no-objection certificate from the State Load Despatch Centre (“the SLDC”). Under the Electricity Act, the SLDC is the statutory body responsible for the technical integrity and the functioning of the grid. However, because of the close relationship between the SLDC and the distribution licensees (the SLDCs are usually the state transmission licensee and were all initially a part of the now unbundled State Electricity Boards), SLDCs would often sit on open access applications, denying the generator the right to sell the power to third parties. In fact, the Central Electricity Regulatory Commission (“the CERC”) has had to amend its inter-state open access regulations to provide that in case the SLDC does not respond on an open access application within a specified period, the approval shall deemed to have been given.

The matter came to a head, when in 2009, Karnataka (and several other states) passed orders invoking emergency powers under Section 11 of the Electricity Act (which states that in extraordinary circumstances a generating company has to operate in accordance with the directions of the State Government) citing the power shortage in the state and prohibiting all independent power producers (“IPP”s) from selling power outside the state and denying all applications for open access. The IPPs challenged the imposition stating that the conditions under Section11 had not been satisfied. The High Court rejected the appeal and upheld the Section 11 orders. The matters are pending before the Supreme Court of India.

The CERC has always been opposed to the imposition of the Section 11 orders, claiming that the whole scheme of open access is jeopardised by these actions and has in fact filed a special leave petition against the decision of the Karnataka High Court. The CERC has even written to the MoP requesting the Government of India to challenge the order before the Supreme Court. Whilst the Government of India has not done so, the MoP has written to the Chief Ministers of various states stating that a ban on open access is not permitted under Section 11. The MoP has also been considering the amendment the Electricity Act to allow IPPs to sell power to consumers using open access without the intervention of the State Government.

The benefits of Open Access

Maharashtra is one of the few states where the regulatory commission decided that the CS Surcharge should be nil. One of the major factors behind this has been the severe power deficiency in Maharashtra. The MERC has reasoned that since there is not adequate power in any case, the state will benefit from industrial consumers moving away from purchasing power from the state utilities, which can then be supplied to other consumers. Despite the cross-subsidy being nil in Maharashtra, MSEDCL has been regularly denying open access applications. The order comes as a great relief for the industry since they would now be able to source power from independent generators under the open access route.

Interference in the open access regime is always going to be counter-productive. The answer is not to ban or prevent open access but to make sure that distribution licensees operate efficiently, that less electricity is lost due to technical inefficiencies in the grid, and that widespread theft of electricity is curtailed. Implementing the projected growth in generation will also increase competition and prices will be naturally rationalised. Further, while reduction in CS Surcharge will result in higher electricity cost for domestic consumers, it will also result in indirect benefits. Since electricity costs form a large part of the cost of manufacturing goods, lower electricity input costs will be passed on to consumers in the form of lower prices of goods.

Open access is more than a statutory provision under the Electricity Act, it is a vital philosophical stand on which the regime under the Act is built. Hamstringing open access with short-term objectives will do more harm than good.